Here is a list of stocks that have traded close to their all-time high and how it correlates with returns. This can be seen as an alternative low volatility strategy while picking stocks. Readers may recall that this is an ongoing exploration of studying low volatility stocks and lazy investing – See Aug 2018 lazy portfolio updates and 30 Low Volatility Stocks from Nifty 100: Aug 2018
To understand why this works, see: Picking Stocks With Low Volatility: A simple, but effective strategy? This post is inspired by a talk given by Mr. Senthil Kumar, trading new highs, at the TamilNadu Investors Association. He talked about how good companies often trade near their lifetime high (price) and one should not shy away from buying them. I cannot agree more.
If we agree that the market decides what a stock is worth, no matter what the balance sheets say, then a stock that trades close to its price maximum has to be a “good stock”. Not only that, it is also a low volatile stock. Here we are defining volatility as a deviation from price maximum instead of using the standard deviation of monthly returns as used here.
Therefore I think we should look closely at such stocks and hence this list. To prepare this list, I have used the Automated Earnings Power Stock Analysis With Screener.in data excel template and ran it over the current list of Nifty 100 – hundred stocks with highest market capitalization.
The price history from Jan 1st 2000 was retrieved and the number of times the price traded (a) at or above the current maximum (b) at or above within 5% of current maximum (lower side) and (c) at or above within 10% of current maximum was computed.
For example for case (a) suppose there are 250 trading days in a year. We find out for how many of these days the price was at or above the price maximum (in this period). So say this is for 20 days. So for 230 days, the stock traded below its maximum. The fraction of time the price traded at/above max = 20/230 = 8.7%
A total of 90 stocks were considered for this study. The rest (10) of them were too young. Out of these 65 stocks had a price history of 18+years, two 17+Y, three 16+Y, sixteen bet 10-15Y and three 8-9Y.
Standard deviation vs annualized return
The standard deviation of daily returns is in the above period is calculated. This tells us how much each return varies from the mean. This is a measure of volatility. Higher the standard deviation, the higher the price will move up and down. There is no correlation between long-term standard deviation and long-term returns.
I do not and cannot read too much into this except to say that the standard deviation cannot be used further, at least in this study.
Trading at or above price maximum vs annualized returns
This is a stringent requirement, so the stock will trade at or above current maximum only for a few days and dividing this by total no of trading days will give a few per cent
Even then, there is a reasonable correlation with the returns.
Trading at or above within 5% of price maximum vs annualized returns
Trading at or above within 10% of price maximum vs annualized returns
Clearly, stocks that have traded close to their maximum have given good returns. Now, please don’t say “that is obvious”. The question I seek to answer here, can we create a shortlist of such stocks for investing?
Before you start talking about “hindsight bias” and all that sort of thing, every piece of information that is used for stock analysis is hindsight bias. Instead of looking at a balance sheet, we are evaluating the stocks in the court of public opinion – market.
Clearly, a stock that does not fall much from the maximum implies that the company has been a profitable one and investor believe that it will continue to do so. In my opinion, there is nothing inferior in using this idea. Of course, the “past performance disclaimer” will naturally apply.
A bigger question that I wish to answer and for which a lot more work is necessary is: can I use only this idea to buy stocks? So I will continue to explore this idea in the coming weeks.
Another question that I wish to answer is: If we look at a stock that has traded close to its max for the last 18Y, was this the case right from the start, say over a 3Y window? If so, can this not be a method to spot potential multi-baggers? Again, I will dig deeper.
My method of stock analysis might sound laughable and primitive to many, but hey who cares? They are not paying my bills. One caveat that needs to be kept in mind though. If a stock that has traded close to its maximum for 10Y+ years, then it must be a multi-bagger. So it should be expensive (unless it has split several times).
The fundamental point I have been trying to make with these low volatility stock posts and lazy investing posts is that there is absolutely nothing wrong in buying an expensive stock of a good business. You may not get 45% returns going forward, buy in the normal course of events you should get inflation-beating returns. So what? Everyone is going to die anyway and none of these gains are coming with us then.
List of Top 25 stocks that have traded close to their “all-time” high
They have been arranged alphabetically. You can download the list in Excel format below.
|Within 5% or above||Within 10% or above||At or above max|
|BAJAJ-AUTO||BAJAJ-AUTO||Axis Bank Ltd.|
|ITC||ITC||I T C Ltd.|
|PIDILITIND||PIDILITIND||Reliance Industries Ltd.|
|SUNPHARMA||SUNPHARMA||Shriram Transport Finance|
|ULTRACEMCO||ULTRACEMCO||Titan Company Ltd.|